Homeowners Blindsided with Stratospheric Flood Insurance Rates

In its monthly e-magazinernForeclosure Report RealtyTrac takes arnlook at the current and potential impact of legislation designed to rescue thernnation’s flood insurance program.  Withinrnthat legislation RealtyTrac says there may be looming another demonstration ofrnthe theory of unintended consequences.</p

The National FloodrnInsurance Program (NFIP) was created by an act of Congress in 1968 to help dealrnwith the escalating cost of the government’s emergency response to floodrndisasters.  Because there was littlernshared risk, i.e. persons who live outside of flood prone areas do not purchasernthe insurance, private companies were either pulling out of insuring in highrnrisk areas or raising premiums to the point of unaffordability, leavingrngovernment to clean up and repair damages after a disaster.  The program provides a government subsidy tornkeep premiums more affordable and as of April 2010 insured about 5.5 millionrnhomes, the majority of which were in Texas and Florida.</p

High-cost flooding disasters suchrnas Hurricane Katrina drained the coffers of the program which is administeredrnby the Federal Emergency Management Agency (FEMA) so in July 2012 Congressrnpassed the Biggert-Waters Flood Insurance Reform Act to help stabilize thernprogram’s finances.  The changes requiredrnNFIP to “raise rates to reflect true risk.” rn</p

These rate changes are beingrnphased in and currently affect only homeowners who purchased their first floodrninsurance after July 6, 2013 with full-risk rates starting on October 1,rn2013.  Virtually all lenders have long requiredrnmortgaged homeowners who reside in a flood plain to carry the insurance so itrnis primarily new homeowners and those who take on a mortgage after previouslyrnowning a home free and clear who are initially being affected by the newrnrates.  However flood plains arernperiodically redrawn and with the increased intensity of weather in some areas,rnmore long-time homeowners may find themselves required to purchase coverage.</p

RealtyTrac’s article PrivaternIndustry Bridges Gap for Skyrocketing Flood Insurance, written by companyrnvice president Daren Blomquist, says that Biggert-Waters “intentionally exempted FEMA from providing any meaningfulrndisclosure to the insurance, mortgage and real estate industries – not tornmention consumers – prior to the implementation of the law earlier this year.” Thusrnthe rate increases blindsided many of those affected by them.  The article looks specifically at areas onrnFlorida’s Gulf Coast and towns such as New Port Richey, in Pinellas County,rninterviewing homebuyers, lenders, and real estate agents.</p

One new homeowner,rnGeorge McLaughlin, purchased a future retirement home in Port Richey in 2012 andrnpaid a $3,300 premium for his first year of coverage.  When he received his new bill for $24,300 bothrnhe and his insurance agent assumed it was a clerical error.  It was not. rnEven his bank was unaware of the pending increase when they wrote thernloan.  RealtyTrac says this was “certainlyrna big oversight for that bank given the additional risk of default that comesrnwith such a dramatic increase in the cost of flood insurance.”</p

McLaughlin, whornpurchased the Florida property while still employed and owning a home inrnMaryland is now carrying two mortgages and facing the insurance bill duernNovember 2 which he still has not paid. rnThus he is technically in default on the Florida mortgage.  The bank has given him 40 days (which wouldrnhave taken him into early December) to provide proof of coverage and have toldrnhim that forced placed insurance will cost as much as $60,000.</p

Blomquist says thernskyrocketing flood insurance premiums “have shocked the entire real estaternecosystem in and around New Port Richey.” rnHe quotes local real estate agent Colleen Monagas as saying the raternquotes started hitting in October and absolutely came as a surprise.  She predicts that the new law could ultimatelyrnlead to more foreclosures in the area as homeowners decide to walk away fromrntheir homes rather than pay the insurance bills.  At the very least she expects the law torncause home prices to drop in high risk flood zones.  She said she has already had buyers abandon plansrnto purchase such houses in favor of those outside the zones, others won’t evenrnlook at houses affected by the rates. </p

“Monagas cautionedrnthat although many rumors are floating around about how to mitigate the impactrnof the Biggert-Waters legislation, the short term impact of the law is tornhobble the nascent recovery in her local housing market, which she said hitrnbottom around July 2012 and really heated up in the spring of 2013.  ‘This spring we were chasing houses,’ shernsaid. ‘I had buyers if you weren’t there in two or three days it was alreadyrnunder contract‘.”</p

Blomquist calls Pinellas County “the epicenter” of the Biggert-Watersrnimpact but says other areas are affected as well.  He cites the popular retirement city of HiltonrnHead, South Carolina which he says has never experienced a hurricane or floodrnin recorded history, as well as coastal areas of Louisiana and Texas. </p

Of course the counterparties to buyers who don’t wish to buy in an arearnare the sellers who won’t be able to sell. rnHilton Head real estate broker Frank Moriarty said, “Peoplernwho have been here a long time…and need to move on, that house is no longerrnyour safety net.”  He predicted thatrnvalues could decrease on the roughly 30 percent of Hilton Head homes locatedrnbelow the 14-foot elevation requirement needed to avoid high cost insurance andrncautioned that the biggest issue could be a fear of rules changing again and pushingrnmore homes into that category.  “‘Somernpeople are saying it might not even be 14 feet, it might be 16 feet or somethingrnlike that,’ he said.” That would be devastating he points out, as that wouldrninclude 70 percent of the properties on the island. </p

Pinellas Countyrninsurance agent Jake Holehouse told RealtyTrac that the elimination of anrnentitlement program like subsidized flood insurance represents a broken promise</bby the federal government which said, it would back these risks if the cities enforcedrnthe flood zone requirements.   Holehouse was referring to the 1968 implementationrnof the NFIP that grandfathered in flood insurance for homes built prior to Jan.rn1, 1975. "'But now 45 years later they are going back on that'," he said.</p